Mr. Chairman and Members of the Subcommittee, thank you for this opportunity to testify.

My name is Ken Boehm and I serve as Chairman of the National Legal and Policy Center (NLPC).  My legal center sponsors the Organized Labor Accountability Project which publishes Union Corruption Update, a fortnightly newsletter summarizing union corruption news and legal cases.  Our database of union corruption case information is available on the web at www.nlpc.org and is used by the public, media, elected officials and union members as an authoritative archive of union corruption cases.
 

Vulnerability of Union Pension Funds to Corruption

Union pension funds are increasingly vulnerable to corruption.  All too many American workers whose retirement security depends on union pension funds have recently found out the hard way that these pensions need greater protection from corruption.

The corruption problems plaguing union pension funds also need to be understood in the context of the explosive growth of pension funds generally.   Secretary of Labor Elaine Chao recently testified before Congress that participants in defined contribution plans have grown from nearly 12 million in 1975 to over 58 million in 1998, with a commensurate increase in assets from $74 million in 1975 to $2 trillion in 1998.  The size and complexity of the pension system along with the complexity of the legal and regulatory system governing that system make it vulnerable to mistakes, mismanagement and corruption.

The scope of the problem can be understood by examining some of the statistics associated with the issue as well as examining some of the recent prominent cases in which workers lost millions of pension dollars due to corruption.

A March 25, 2002 BNA Daily Labor Report article based on an interview with Department of Labor Inspector General Gordon S. Heddell provides a good idea of the scope of the problem affecting union pension funds.  As of March 2002, there were 357 pending labor racketeering investigations under way by the Inspector General.  Of those, 39% involved organized crime and of the 357 investigations, 44 percent involve pension and welfare plans.  The IG cited a number of cases in which pensions lost funds because of violations of fiduciary duties by plan trustees and stated that investigations of this type involve plan assets of more than $1 billion which are at risk.

The Department of Labor Inspector General used his Annual Report to Congress filed in January 2002 to emphasize his concern:

  Another area of concern involves private pension plans,
  which serve as an attractive target to organized crime elements,
  corrupt pension plan officials, and individuals who influence
  the investment activity of pension assets.  Labor racketeering
  investigations of pension plan monies jointly administered
  by labor union representatives and management representatives
  (Taft-Hartley plans) have elevated the OIG’s concern over
  the security of the assets in this segment of the pension plan
  universe.

In the Ullico case, which I review at greater length  later in my testimony, an insurance company owned largely by union pension funds secretly allowed members of its board of directors, which included many presidents and top officials of labor unions, to conduct insider stock deals in such a way as to enrich themselves at the expense of the pension funds.  More than six-and-a -half million dollars appears to have been pocketed by the labor leaders.  A federal grand jury in Washington is currently investigating as is the Department of Labor.

In a recent New York case, the F.B.I. indicted 120 individuals as part of “Operation Uptick,” an investigation of organized crime influence on Wall Street. One of the individuals convicted was John M. Black, Jr., an alleged associate of the Luchese crime family.  The conviction was for racketeering conspiracy, bribery and fraud charges stemming from a scheme to pay illegal kickbacks to union leaders in order to get union pension fund assets invested in fraudulent investments.  The  scheme’s goal was to get $300 million in union pension funds to the control of a crooked investment adviser.

Recent cases of union corruption, notably embezzlement, have increased to the degree that the New York Times (“Corruption Tests Labor While it Recruits,” Jan. 3, 1999) has termed the phenomena “a wave of union corruption.” While most cases involve union funds as distinguished from union pension funds, the cases involving pension funds tend to involve larger amounts of money.   Much like bank robber Willie Sutton’s classic answer to the question as to why he robbed banks (“That’s where the money is.”), the pension funds represent a rich target for corrupt union officials.

The ever-growing amounts of money in union pension funds combined with the variety of imaginative ways such money can be vulnerable to criminal schemes calls for increased oversight as a deterrent as well a careful effort to eliminate existing weaknesses in the enforcement system.

Union pension funds have been vulnerable to corruption in various ways.  Recent losses due to corruption and/or mismanagement illustrate just how vulnerable union pension funds can be:
 

The Capital Consultants Case: $100 Million in Pension Funds Lost

In a recent Oregon case, more than $100 million in union pension funds was lost.   The case focuses on the conduct of a money management firm, Capital Consultants, which mismanaged huge amounts of union pension funds in what the government has called “Ponzi-like schemes” in which fresh infusions of capital were needed to disguise earlier losses.

Gifts of travel, gratuities, and contracts were used as inducements to union fund trustees to do business with Capital Consultants.  One of the Capital Consultants principal owners was indicted for paying over $200,000 to John Abbott, a trustee of the Laborers Union pension fund.

Guidelines restricting risky investments were watered down.  For example, the pension fund of the International Brotherhood of Electrical Workers Eighth District in the early 1990’s had a $300,000 limit on the amount Capital Consultants could loan to any one borrower in a private placement.  In 1996, the trustees changed this limit to 20% of the fund’s assets under management by Capital Consultants.  And in 1997 the trustees changed the limit to 50%.  By 2000, the fund had $46 million under management, most of it in risky private placements.

Other examples of guidelines being ignored were just as egregious.  In the case involving the Oregon Laborers-Employers Health and Welfare Trust, the plan called for investments only in readily marketable securities and real estate.  Yet during the 1990s, Capital Consultants invested up to 35% of the fund under its management in collateralized notes.

Similarly, the United Association of Plumbers and Pipefitters Local 290’s pension plan was repeatedly warned by its outside financial investment monitor about Capital Consultants private placements.  Specifically, the trustees were warned of the private placements’ low returns and high risks.  The monitor characterized Capital Consultants’ nontraditional asset portfolio as “drastically underperforming.”

Indeed,  in five funds administered by Capital Consultants there was a pattern of trustees repeatedly ignoring warnings from outside investment monitors.

Additionally, a multi-million dollar loan, much of it from union pension funds, was made by Capital Consultants to a company linked to a businessman with a long association to late mob financier Meyer Lansky.
 

The Diplomat Hotel: $800 Million Money Pit for Plumbers Union Pension Fund

The Plumbers and Pipefitters National Pension Fund, which covers 123,000 union members, had never owned a hotel when it purchased the aging Diplomat Hotel in 1997 in Hollywood, Florida for $40 million with plans to renovate it.  What went wrong is a virtual laundry list of almost everything that can possibly go wrong with a pension fund investment.

The Department of Labor was kept in the dark as the project quickly spun out of control.  A plan for the pension fund to spend $100 million on renovation with investment partners to pay the rest soon became a $250 million budget with no investment partners.  The budget grew to $400 million then $600 million and finally to an estimated $800 million.

Investigative journalism pieces in the Sun-Sentinel ,ABC-News, and other media pointed to some of the problems:

 • it was a beach-front hotel but it had almost no beach

 • despite being owned by a construction union pension, the construction was plagued with problems: uneven floors, tilted walls and leaky pipes

 • it became the subject of a lengthy Department of Labor investigation

 • there were allegations that a big construction contract went to a company with ties to organized crime

 • the over-budget, over-deadline construction project quickly approached 20% of the pension fund’s investment assets
 
 • Plumbers Union President Marty Maddaloni was found to have illegally taken   a  $12,000 trip to Italy from a contractor for the hotel’s marble - a violation of the Employee Retirement Income Security Act (ERISA)

 • an appraisal of the hotel’s value found it to be worth $587 million, far short of the $800 million cost to the pension fund

 • the Diplomat’s incredible cost per room of about $755,000 was about 75% more than construction costs for comparable luxury hotel rooms in South   Florida

Indeed, an assessment by an analyst cited by the Sun-Sentinel (“Members Hope There’s Room for a Profit; Analysts Express Doubts About Returns,” May 14, 2001, page 15A) found that to return a mediocre 5.5 percent interest on the pension fund’s money, the hotel would need to earn almost $44 million a year after expenses.  One estimate was that the Diplomat would only earn between $15 million and $25 million a year.

The hotel became an issue with the union’s members as the project faced increasing cost-overruns and delays.  One of the construction firms involved was Structure Tone, a controversial choice because it had pleaded guilty to a felony bribery count in 1998 in New York, paying $10 million to settle charges, in connection with a bid-rigging scheme.

In a March 7, 2002 letter to members, Plumbers Union President Marty Maddaloni wrote that the Department of Labor may take legal action against the trustees of the Plumbers and Pipefitters Pension fund in connection with the Diplomat Hotel project.

The Ullico Insider Stock Scandals

As a result of a series of recent articles in Business Week  and The Wall Street Journal, a whole new controversy linked to Global Crossing has arisen.  The focus is on Ullico, a privately held insurance company which is owned largely by unions and their pension funds.  It was an early major investor in Global Crossing and its directors used the telecom’s volatile stock price history to personally enrich themselves at the expense of the union members and retirees whose pension funds own Ullico. Its board of directors is mostly made up of current or former union presidents and includes AFL-CIO head John Sweeney.

The multi-billion dollar Ullico was one of the original investors in Global Crossing, providing $7.6 million to the company in seed money.  Global Crossing chairman Gary Winnick was pleased to get the early money and allowed Ullico directors the opportunity to personally buy the Global Crossing stock at IPO prices.  This sweetheart stock investment deal allowed some Ullico directors to make millions off the sale of the stock according to labor officials. (“Global Crossing: Labor’s Questionable Windfall,” by Aaron Bernstein, Business Week, March 14, 2002)  The fact that Gary Winnick offered such a lucrative deal to Ullico directors has raised questions as to the integrity of Ullico’s investment decision making with respect to Global Crossing as well as with other Ullico investments of pension funds into deals associated with Winnick during the same time period.
 
Ullico’s directors also benefitted personally from an arrangement set up in 1997, the same year Ullico made its original investment in Global Crossing, which allowed Ullico to repurchase its stock from shareholders.  Departing from a practice of giving Ullico’s stock a fixed value of $25 a share, Ullico began changing its share price annually according to a value determined by an accounting review.  Insiders knew in advance of the price change whether the stock would go up or down and set up a system that allowed them to buy or sell to lock in a profit.  It was the equivalent of investing in the stock market when you knew for sure which way a given stock would go.

In practice, this scheme allowed directors to make virtually guaranteed insider profits.

Here’s the way Business Week labor reporter Aaron Bernstein describes how Ullico directors personally profited from the arrangement they approved for themselves:

Fall, 1999  Ullico is losing money on its operations but earns $127 million by selling some Global   stock. Insiders knew those gains would lift the annual valuation of Ullico’s shares from $54 to about $146 when its books closed on Dec. 31.

December 1999  Ullico offers each director the chance to buy 4,000 Ullico shares at the 1998 valuation of $54.  The union pension funds that own almost all of Ullico aren’t given the same offer, or even told about it.

Dec. 2000/Jan. 2001 Ullico buys back 205,000 of its 7.9 million shares at $146.  Stockholders with fewer than 10,000 shares are allowed to sell all their holdings, so officers and directors can take full advantage, but the pension funds can’t.  Insiders know the decline of Global Crossing’s stock puts the true value of Ullico’s shares closer to $75.

Dec. 2001/Jan. 2002  Ullico buys back an additional 200,000 shares, allowing officers and directors who hadn’t sold before to cash out at $75.  Again, insiders know that the further collapse of Global has again cut Ullico’s true value, this time to $44.

March 2002  Ullico’s pension-fund shareholders now own a less valuable company.  Its Global profits have gone disproportionately to officers and directors, some of whom are trustees of the union pension funds that lost out on the deal.   (“Global Crossing: Labor’s Questionable Windfall,” Aaron Bernstein, Business Week, March 14, 2002)

Just blocks from this hearing room, a federal grand jury has been hearing evidence about the Ullico case.  Ullico officials have been subpoenaed to describe how board members bought and sold stock in the privately held Ullico.
 
The U.S. Attorney’s office originally came across the Ullico case while conducting a criminal investigation of Mr. Jake West, former head of the ironworkers union.  Mr. West, a Ullico director since 1990, has been indicted on federal charges that he embezzled funds from his union. He is currently awaiting trial on the embezzlement charges.

Union leaders have a fiduciary duty to serve the best interests of their members.  This duty is found throughout federal labor law.  In reaction to the old-fashioned corruption of sweetheart deals in which management paid labor bosses bribes to betray their union, federal law strictly forbids a whole range of corrupt practices:

 • Employers may not contribute to union elections

 • Employers may not give union officials money or anything of value

 • Union officials have a very strict and very broadly construed fiduciary duty to    put their responsibility to their members above their own personal interests, especially their financial interests.

Aside from the federal grand jury currently hearing evidence pertaining to possible criminal liability in the Ullico case, the Department of Labor is investigating whether the Ullico stock schemes violated civil labor laws against conflict of interest.  If such a conflict of interest occurred, and evidence is mounting that it clearly did, the result could be fines and removal of offenders from union office.

While the excellent investigative articles in Business Week  and The Wall Street Journal have done a fine job of detailing the self-enrichment games played with Ullico stock at the expense of union pension funds, the conflicts of interest associated with Gary Winnick’s dealings with the Ullico board were only touched.

So why would Ullico’s board of union bosses not only invest more than $7 million in seed money with Winnick, but also get involved in a number of other venture capital deals?
Certainly, the prospect of being cut in on the lucrative IPO stock offer was an inducement that may have made the Ullico board pour union pension funds into Winnick’s non-union company.

The Ullico board also jumped into deals with Pacific Capital Group (PCG), an investment firm owned by Winnick.  Together with PCG, Ullico invested in the high-flying internet company, Value America, another non-union company which quickly went into bankruptcy.  And Ullico went in with PCG on Playa Vista, a troubled Los Angeles real estate deal plagued with environmental and regulatory problems.  One of Ullico’s top officials, former Democratic National Committee executive director Michael Steed went to Winnick’s PGC as a managing director and went onto the Value America board.

As revelations continue to grow about the Ullico case, the most common reaction appears to be how closely the actions of the Ullico board resemble what union chiefs so often denounce as wrong with corporations.  Consider this recent comment by AFL-Cio head John Sweeney:

“Enron exposed what many of us have been saying: the boards of directors that are charged with acting in the interests of investors and the public are riddled with greed, self-dealing and plain selfishness.”

It’s difficult to imagine the Ullico board going forward with their self-enriching schemes if the head of the AFL-CIO strongly opposed them.  Nor is there any evidence that Mr. Sweeney or any of the other directors took any steps to expose the secret deals.  Just the fact that the group of union bosses busily enriching themselves at the expense of their own members chose to keep their deals secret speaks volumes about what they considered the deals to be.
 

What Should Be Done?

Without question, the first step to providing American workers with better protection for their union pension funds is to recognize the scope of the problem.  As the baby boom enters retirement age, the amount of money in such pension funds has soared.  The size of the pension funds and the sometimes inadequate oversight has already proven to be a tempting target with hundreds of millions of dollars in pension funds stolen in recent years.

The frontline of the effort to ensure the integrity of union pension funds is overseen by the Department of Labor’s Pension and Welfare Benefits Administration as well as the
Department of Labor’s Office of Inspector General.  Given the tens of billions of dollars currently in union pension funds, a well-funded oversight effort is essential to prevent the often sophisticated schemes used to loot pension funds.  From a cost-benefit analysis, the cost of such oversight is miniscule comparative to the amount of funds potentially at risk without such oversight.

Legislatively, much can be done to promote better financial disclosure as a deterrent to corruption affecting pension funds.  While the Employee Retirement Income Security Act (ERISA) has very strict standards for fiduciary responsibilities of fund trustees, much more can be done to require public disclosure by union officials of outside income.  Any review of union corruption cases underscores that embezzlement schemes of many kinds invariably result in income to corrupt union officials.  Historically, this has been true with sweetheart contracts in which union officials are paid off by management to betray the interests of their rank and file but it is also a common phenomena in cases in which union leaders controlling large pension funds are tempted by lucrative and imaginative business deals to place those funds in dubious investments of all sorts.

One way to deter such schemes would be to require annual financial disclosure by union officials, especially those overseeing pension funds, of all outside income.  Most such officials already receive six-figure salaries for their executive positions so outside income typically is limited.  A disclosure requirement modeled after the one in the Ethics in Government Act for senior government employees would do much to deter the sophisticated bribery schemes common to pension corruption cases.

If the union officials on the Ullico board of directors had to disclose their inside trading profits in Ullico stock, it is doubtful they would have been as eager to pursue the secret arrangement by which they enriched themselves at the expense of their members.

Yet another disclosure reform to deter corruption affecting union pension funds would be to ensure that independent public accountants with knowledge of possible pension fraud have a legal duty to report such information to the Department of Labor.  As the Department of Labor Inspector General recently pointed out, independent public accountants presently are not required by law to report ERISA violations to the Department of Labor.  There is no rational justification for such a loophole if we are serious about protecting pension funds relied upon by American workers.

Earlier this year, this Subcommittee held hearings which featured extensive testimony calling for better disclosure of union financial information.  The underlying belief that “Sunshine is the best disinfectant” cited in those hearings is even more compelling when union pension funds are under consideration because the financial stakes are so much higher.

Finally, while the Employee Retirement Income Security Act (ERISA) has done much to protect American pensions, it can be reformed to provide even better protection.

One gap that needs to be filled involves a weakness of audits performed under ERISA.  this weakness was addressed by the Department of Labor Inspector General in his Fiscal year 2001 Annual report to Congress filed in January 2002:

  ERISA contains a limited-scope provision that results in
  inadequate auditing of pension plan assets because it
  exempts from audit all pension plan funds that have been
  invested in institutions such as savings and loans, banks,
  or insurance companies regulated by federal or State
 ` governments.  At the time ERISA was passed two
  decades ago, it was assumed that all of the funds being
  invested in those regulated institutions were being adequately
  reviewed.  Currently, because of this provision, independent
  public accountants (IPAs) conducting audits of pension plans
  cannot render an opinion on the plans’ financial statements
  in accordance with professional auditing standards.  These
  “no opinion” audits provide no substantive assurance of
  asset integrity to benefit participants or the Department.

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Appendix: Recent Union Corruption Stories Involving ERISA-Protected and Similar Benefit Funds

Other Congressional Testimony

Organized Labor Accountability Project

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